Understanding the Problem
The level of unaffordable student debt in the United States has reached staggering levels in recent years, but few understand the true root cause of the issue. The financial benefits of a college degree seem clear; college graduates are likely to earn, on average, $1 million more over the course of their careers than those with only a high school degree.¹ Despite this, and even with federal student loans currently pricing at historically low rates, students are dropping out of college at an alarming rate due to unaffordability. Often these dropouts have already incurred significant amounts of debt but without a degree. In the pages that follow, the nuances of this complex dilemma are explored in detail.
1 Carnevale, Cheah, and Hanson, “The Economic Value of College Majors.” Georgetown University Center on Education and the Workforce, 2015.
Access to Funding: Existing Options & Their Limitations
There are currently several federal college funding programs, such as Pell Grants, Stafford Loans, and the PLUS program, available to students pursuing their degree. Pell Grants are need-based grants that do not require any repayment, but are currently limited to $6,495 per year.2 Stafford Loans are subsidized loans with very low interest rates (currently at 3.73%) but are again limited to an annual cap of $12,500 per student.3 The PLUS program, which has no limit and offers relatively low interest rates (currently 5.75%), requires a creditworthy cosigner. In total, students without a cosigner have access to approximately $19,000 per year for college through federal funding programs; however, the costs related to pursuing a college degree – including public universities – meaningfully exceeds this amount, as demonstrated in the following table.
2 Federal Student Aid. Federal Pell Grants Are Usually Awarded Only to Undergraduate Students. 2021
3 Federal Student Aid. The U.S. Department of Education Offers Low-Interest Loans to Eligible Students to Help Cover the Cost of College or Career School. 2021
2020-2021 Total Annual Average Cost of 4 Year Colleges4
|College Type||Total Annual Average Cost||Federal Funding without Cosigner||Federal Funding Gap|
|Public Out of State||$43,280||$19,000||$24,280|
Total Annual Average Cost
Federal Funding without Cosigner
Federal Funding Gap
Total Annual Average Cost
Federal Funding without Cosigner
Federal Funding Gap
Total Annual Average Cost
Federal Funding without Cosigner
Federal Funding Gap
The table above illustrates the tremendous funding gap students must overcome today, ranging from $7,820 to $35,880 on average.
4 Source: College Board
In 2016, over 75% of students experienced unmet financial need, representing an increase of nearly 25% from 2011.5 This trend illustrates the extent to which the funding gap in the United States is accelerating. On average, the funding gap for students in 2016 stood at $9,100 for public universities, and those at private colleges saw a funding gap of $14,000.6 This depicts one of the core issues contributing to America’s student loan crisis: lack of access to the full amount of costs related to college education.
In the Bill and Melinda Gates Foundation study of college attendance patterns, With Their Whole Lives Ahead of Them: Myths and Realities About Why So Many Students Fail to Finish College, a survey of more than 600 adults who had at least some higher education coursework showed that the leading explanation offered by respondents for dropping out of school was needing to make money (71%), followed by inability to afford the tuition and fees (52%).7More recent surveys support those conclusions.8 Had these students benefitted from ample financial resources, they would have been significantly more likely to complete their degree (and likely on time or close thereto). Additionally, nearly 58% of college students who failed to graduate reported that they paid for costs related to pursuing their degree by themselves without assistance from their families.9 In contrast, more than six out of ten students who completed their degrees say they had “help from parents or other relatives to cover the costs of schools.”10 The deep financial stress experienced by students without financial support from family is a pressing, time-sensitive socioeconomic issue that requires immediate attention.
5 Walizer, Lauren, “When Financial Aid Falls Short: New Data Reveal Students Face Thousands in Unmet Need.” The Center for Law and Social Policy, December 2018
7 Johnson, Jean, and Jon Rochkind, “With Their Whole Lives Ahead of Them: Myths and Realities About Why So Many Students Fail to Finish College.” Public Agenda, 2008.
8 LendEdu & Funding U 2018 Student Survey. Admissionsly, “Eye Opening College Dropout Rates & Statistics, 2021.
9 Jo Ibid.
Consequences & Disparities of the Funding Gap
There are currently over 45 million student borrowers in the U.S. who collectively owe more than $1.73 trillion in educational debt.11The average student owes over $30,000 upon graduating, with repayment periods typically lasting 21 years.12
Unfortunately, the lack of complete funding opportunities often leads to either lengthy delays in graduation as students work part-time or full-time jobs to pay for their degree or dropping out of college altogether. This results in a highly unfavorable outcome: students with accumulated debt and without the future benefits of a completed degree.
It is also important to note that failing to complete a college degree due to insufficient funding disproportionally impacts low-income students. In 2018, there was a 30 percentage-point gap in college enrollment between dependent 18- to 24-year-olds from families in the highest and lowest income quartiles.13 Additionally, data provided by the U.S. Census Bureau illustrates that in 2016 bachelor’s degree attainment rates by age 24 are 5 times higher for those in the highest income quartile than for those in the lowest income quartile (58% versus 11%).14
This variance in college attendance and graduation can be attributed to, in part, the unmet financial need differentiation among students of different income quartiles. On average, students from families in the lowest 25% of income in the United States have a funding gap of $15,800, while students from families in the top 25% of income have a funding gap of only $6,000.15
11 Hanson, Melanie, “Student Loan Debt Statistics.” Educationdata.org, 10 July 2021
12 One Wisconsin Institute. The Impact of Student Loan Debt on the National Economy, 20 June 2013
13 U.S. Census Bureau. Postsecondary Education Opportunity (PEO), 2019
14 U.S. Census Bureau. P20 Report on School Enrollment, 2018
15 Walizer, Lauren, “When Financial Aid Falls Short: New Data Reveal Students Face Thousands in Unmet Need.” The Center for Law and Social Policy, December 2018
Choosing a College: The Need for Informed Decision-Making
But the problem is not just a matter of limited access to tuition funding. Indeed, the fact that so much tuition has been funded by loans is a direct cause of the ballooning outstanding student debt. Often students do finish the college programs they started but still find themselves with unpayable student debt. The problem here is that they over-borrowed compared to what they could afford from the likely career outcome of finishing the education they sought. They didn’t rationalize the amount of borrowing they incurred relative to their ability to pay it off.
The Obama-era Department of Education sought to address the problem of limited school outcomes data with the creation of a public database of financial outcomes by school and field of study the “College Scorecard”. In theory, access to information such as university and major program graduation rates and starting salaries would enable students to make more informed decisions about their education and the appropriate amount of debt to take to complete the education. However, while the potential benefits of a robust and accessible dataset are clear, in reality, it is unclear if students review this data prior to making decisions about their education. Certainly, students attend schools with unfavorable historical outcomes, choose fields of study with poor prospects for financial success, and/or choose to attend a school with tuition that cannot be rationalized by the quality of the education.
Furthermore, federal student loan programs offer no guidance on this matter. Every student receives the same amount of funding at the same interest rate regardless of how the funds are used. Similarly, many private student loans price solely based on student/cosigner FICO score without consideration for the student’s expected career trajectory. As a result, many students complete college only to find that the cost of the degree was not commensurate with the result because the school or field of study is unlikely to pay off.
Making Ends Meet: The Insufficiency of Existing Solutions
Students look to a variety of alternatives to meet the current college funding gap. According to a study by LendEDU, an online marketplace for student loan products, among students who could not pay for college in its entirety in the 2017-2018 school year, 28% of students financed the gap using private cosigned bank loans, 12% of students used credit cards, and 9% of students used private non-cosigned bank loans.16
The most effective alternatives are private or school-sponsored scholarships, but they are limited. Another option is private student loans, which appear to offer a solution that is tailor-made for the student funding gap, but, as previously noted, private student loans are not readily available to students without cosigners. For students without a credit worthy cosigner, private bank loans are essentially unattainable. 95% of loans require cosigners with high FICO scores (i.e. above 700).17 For students without strong credit or cosigners, there are fewer opportunities to identify capital to bridge the funding gap.
It is tempting to conclude that the solution is to increase the amount of federal assistance for students to close the funding gap, as has been the preferred solution for decades. However, tuition cost growth outpaces the government’s ability to increase available funding, meaning the gap never shrinks. It is argued that higher federal assistance may in fact exacerbate the problem by causing universities to raise tuitions even faster. This has certainly been the historical experience.
One can also consider the alternative option of tuition-free college. However, this approach would likely just shift the burden from students to taxpayers without meaningfully addressing the causes of the problem.
16 Brown, Mike, “College Students Are Dropping Out Without Cosigners | Survey & Report.” LendEdu, 28 May 2020.
17 DBRS Morningstar. Presale Report SMB Private Education Loan Trust 2021-A, 28 January 2021.
Edly’s Solution to the Student Debt Crisis
To address the student debt crisis, Edly attacks the dual problems of access to affordable financing for college and limited practical information on college outcomes. Borrowing from the best features of various types of income-based financing programs used globally, Edly offers an affordable funding solution that attempts to resolve many of the outstanding issues of the current system.
Edly is designed to fill the post-federal student loan gap of $9,000 to $15,000 per year outlined above for students who do not qualify for or cannot afford private student loans. Edly IBRs therefore do not compete with federal education loan options, which do not cover the funding gap in its entirety, rather they supplement these federal programs. The instrument Edly uses is Income Based Repayment Loans (“IBRs”). The fundamental feature of this product is that students only pay an affordable percentage of their income (e.g. 6%) until termination of the agreement through reaching one of the contracted thresholds (total payment count, total dollars paid, APR paid). The instrument is flexible, including features like no payments required while either unemployed or earning a salary below a floor (e.g. $30,000 per year). As such, there is alignment of interest between the students and Edly with respect to risk of success.
Private student loan companies typically require cosigners and high credit scores because they only underwrite a limited view of credit – one without considering the students themselves, their education choices, or the context of the job market. On the other hand, Edly specifically underwrites education decisions, analyzing data provided by resources such as the Department of Education to accurately predict student financial outcomes. Edly can therefore provide funding to a much wider group of students by excluding the cosigner requirements common in private student loans.
In line with the aim to promote cost-effective access to education, Edly encourages students to exhaust all lower-cost forms of educational funding first (e.g. grants, government loans, and certain cosigned private bank loans). Edly IBR Loans can then be used to supplement the remaining gap in tuition funding needs.
It is important to note that the form of Edly’s tuition funding is a qualified private student loan. As such, Edly fully embraces the student loan requirements of disclosure and other requirements which are fundamental to protecting student borrowers. Edly is unique in both providing outcomes-based tuition funding and doing so within the existing student loan regulatory system.
Perhaps the most meaningful impact of the Edly approach is that it provides actionable information and rationalization of the costs of specific colleges and fields of study. Edly will only provide funding to programs with historically favorable outcomes. In this way, Edly IBR Loans act as type of rating of the quality of a program. While the Federal programs do a good job of providing the bulk of the tuition funding at low or no cost to students, the addition of Edly’s outcomes-based underwriting ensures that only quality programs will get full funding. Over time this should help to weed out poorly performing programs and the negative effects on the students who choose them.
Edly is designed to be an impact investing solution. Edly’s impact stems from providing access, affordability, and information. It provides students the opportunity to complete their degree via IBR Loan financing and therefore join the workforce with steady cash flow more swiftly and seamlessly. Organizations such as the OECD have examined why American students drop out of university at considerably higher rates than most developed countries.18 Such studies reveal that the long-standing policies to help students achieve higher education are outdated and fail to sufficiently support the modern student.
Edly responds to the challenges, problems, and limitations of the current student loan system by offering an alternative financial solution in the form of Income Based Repayment Loans. These loans which are common in many other countries and whose principles are used by the US government in restructuring old student loans are new in the US as a primary funding source. Edly seeks to IBR Loan funding that will improve access to education and student attainability of advanced degrees. Edly accomplishes these goals by helping to narrow the funding gap for college students, reducing incidence of dropouts due to insufficient funds and easing the burden of student loans, particularly for students from lower income backgrounds and providing information which helps all students rationalize their education funding choices.
With Edly, students will not be suffocated by debt, rather they will exchange a reasonable percentage of their future salary in return for college funds. Edly income repayments are also subject to lifetime caps on total payments as well as APR-based caps.
Through achieving these goals, Edly will assist in solving the mounting student debt crisis in the United States. This in turn will both contribute to increasing the United States’ international competitiveness and fight domestic economic insecurity and inequality.
18 Weston, Liz, “OECD: The U.S. Has Fallen Behind Other Countries in College Completion.” Business Insider, 9 September 2014
College costs have risen tremendously over the last 25 years, with tuition spiking more than 400% since the 1986 school year. Meanwhile, median family income has increased less than 150%, resulting in a substantial mismatch between capital needed to receive a higher degree and the financial ability to do so.19 This makes college more difficult to afford and leaves students with a larger funding gap than ever before.
Edly helps to close the funding gap in American higher education while rationalizing the choices of educational programs which should reduce college dropouts due to insufficient funds, ease the burden of student loans, and improve education access for low-income students.
19 National Center for Education Statistics. “Tuition Costs of Colleges and Universities”. Data from 1986 to 2019 school years. Citing sources: US Department of Education, National Center for Education Statistics (2021), Digest of Education Statistics 2019 (NCES 2021-009).